What is the deal with high cryptocurrency premiums in Korea?
South Korea is the world’s 11th largest economy according to the World Bank. Recently, South Korea has emerged as a major driving force behind the significant increase in the price of Bitcoin, as well as Ethereum, Litecoin, and Ripple.
The demand in Korea has meant that buyers in Korea have been buying cryptocurrencies at far higher rates than the rest of the world market. Over the past several months premiums in Korea have fluctuated above the market and have even reached 50% premium over the global market. This has opened arbitrage opportunities for those who were able to obtain cryptocurrencies at US or European market rates and sell them on the Korean market.
Coinone, Korbit, and Bithumb are the largest exchanges in Korea and have all had significant user growth and trading activity over the past two months. The added volume to the exchanges has even made them liquid enough for million dollar market orders to be executed and move the price only a few hundred dollars. This liquidity surpasses other more well known exchanges such as Kraken.
What is it about the Korean market that these exchanges can suddenly have large volumes over the more globally well-known international exchanges? And also sustain these higher volumes month-over-month with significantly higher premiums?
Korea is country that is well-known to be an early adopter of trends. The advent of Bitcoin and cryptocurrencies has been well-covered by the media in this country and have appeared in the top 10 search results on Naver (Top search engine in Korea). Once Bitcoin had demonstrated that it was not going to dry up and blow away it was a matter of time before savvy Koreans would pounce on the opportunity to become early adopters and investors in the new digital currencies.
Unlike China, which has massive mining operations taking advantage of an accidental government subsidy in the form of overinvestment in underused infrastructure and cheap energy, there is no mining activity to speak of. Therefore, Bitcoin and Ethereum must be imported from abroad, driving up the domestic premium in Korea.
Additionally, there are some other limiting factors that complicate arbitrage that would take advantage of the high premium and drive it down. In response to the 1997 economic crisis of “hot money” suddenly exiting from Korea, resulting in the intervention of the IMF to stabilize the Korean economy, capital controls were imposed and remain in place. As an individual you are not allowed to send more than 50 million KRW (US $45,000) out of the country, limiting the number of arbitrage cycles that can be performed. Further, it is very difficult for foreigners outside of Korea to get into this market because of many other restrictions.
That being said, Korea’s advanced infrastructure and support for new technologies will make South Korea a key market for cryptocurrencies in the world and it will continue to play a leading role, even if the conditions of high domestic premiums persist into the future.
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